Thursday, August 16, 2007

August 15, 1971:

Nixon's Wage and Price Controls

Wage and price controls were unprecedented in peacetime, but by the summer of 1971, Richard Nixon and his staff, along with much of the country, had decided that the rate of inflation was too high to bear -- persisting above 4 percent in 1971, and briefly exceeding 6 percent in 1970. So on August 15, 1971, President Nixon announced a 90-day freeze on wages, prices and rents.

It was never clear that the president had the authority to do such a thing, short of wartime necessity. Strangely, however, the freeze was never challenged in court, perhaps because of its initial popularity. In any case, its subsequent failure discredited the idea so completely that it has never been tried again in the United States. Whip Inflation Now was weak tea by comparison.

In The Commanding Heights (1997), Daniel Yergin and Joseph Stanislaw wrote, "With inflation rising, the clamor to do something was mounting in both political circles and the press. At the end of June 1971, Nixon had told his economic advisors, "We will not have a wage-price board. We will have jawboning." But resistance to an income policy weakened with each passing month. The climax came on August 13-15, 1971, when Nixon and 15 advisors repaired to the presidential mountain retreat at Camp David. Out of this conclave came the New Economic Policy, which would temporarily -- for a 90-day period -- freeze wages and prices to check inflation. That would, it was thought, solve the inflation-employment dilemma, for such controls would allow the administration to pursue a more expansive fiscal policy -- stimulating employment in time for the 1972 presidential election without stoking inflation...

"Most of the participants at the Camp David meeting were exhilarated by all the great decisions they had made. During their discussions, much attention was given to the presentation of the new policy, particularly to television. President Nixon expressed grave concern that if he gave his speech during prime time on Sunday, he would preempt the tremendously popular television series Bonanza... But his advisors convinced him that the speech had to be given before the markets opened on Monday morning, and that meant prime time. A few of the advisors would recollect that more time was spent discussing the timing of the speech than how the economic program would work. Indeed, there was virtually no discussion of what would happen after the initial 90-day freeze or how the new system would be terminated.

"The Cost of Living Council took up the job of running the controls. After the initial ninety days, the controls were gradually relaxed and the system seemed to be working. But unemployment was not declining, and the administration launched a more expansionary policy. Nixon won reelection in 1972. In the months that followed, inflation began to pick up again in response to a variety of forces... Nixon, under increasing political pressure from the investigations of the Watergate break-in, reluctantly reimposed a freeze in June 1973. Government officials were now in the business of setting prices and wages.

"This time, however, it was apparent that the control system was not working. Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets. Nixon took some comfort from a side benefit that George Shultz, at the time head of the Office of Management and Budget, identified. 'At least,' Shultz told the president, 'we have now convinced everyone else of the rightness of our original position that wage-price controls are not the answer.' Most of the system was finally abolished in April 1974, 17 months after Nixon's triumphant reelection victory over George McGovern -- and four months before Nixon resigned as president."

1 comment:

Adam said...

Hopefully we can learn from our mistakes. I also found a great article and commentary about Nixon's Wage and Price Controls as it relates to some of the decisions being made today. Check out: